Soft Core

For almost two years, downtown commuters crawling along the Harbor Freeway each day have been treated to a nifty sideshow

For almost two years, downtown commuters crawling along the Harbor Freeway each day have been treated to a nifty sideshow: construction of L.A. Live, the $2.5 billion monster development next to the Staples Center. Parts of the complex, such as the 7,100-seat Nokia Theatre, have been open for some time, while an assortment of restaurants and nightclubs is coming on line. The main attraction, a 54-story high-rise that houses a Ritz-Carlton hotel, a Marriott hotel, and 224 luxury condos, is scheduled for completion next year and should generate plenty of business for the underperforming Los Angeles Convention Center. The floor-by-floor progress can even be followed through time-lapse photography on YouTube.

L.A. Live is the most conspicuous element of downtown’s growth surge, and the developer, Anschutz Entertainment Group, isn’t exactly subtle in its hype. “Imagine being ‘in the moment,’?” begins the Web site description, “when nothing else matters but what is going on around you right then and right there.” Supporters often describe what’s going on downtown as a “renaissance,” and from the clogged lanes of the 10-110 interchange, it would be hard to argue. Sparkling skyscrapers, a world-famous sports arena, spruced-up historic buildings, loft conversions, and now a brand-new entertainment district—Hollywood set designers couldn’t come up with a better urban scene.

Downtowns, of course, must be more than their skylines, and the truth is that development has hit a wall. Once L.A. Live’s convention center hotels are finished, construction cranes will be a rare sight for at least several years. By the end of 2008, the economic bust had essentially frozen all residential projects that lacked financing. The massive Grand Avenue development, which was to be the northern bookend to L.A. Live, with a mix of hotels, condos, and retail, has been on hold for months because the developer cannot get a construction loan. Completion of the first phase was scheduled for 2011, but that’s unlikely to happen.

Certainly downtown is not the only place where projects are in trouble. Plans for a 45-story luxury condo tower at Santa Monica Boulevard and South Moreno Drive (the old Jimmy’s location at the edge of Century City) have been shelved by the Irvine developer Suncal. Its main equity partner, Lehman Brothers, went bankrupt last fall. Next to the Beverly Hilton, the 9900 Wilshire condo development is adding a luxury hotel, since that’s the only way a new lending package can be approved. Such setbacks are a sign of the times, but downtown is being particularly affected because so many projects had been planned, from modest restorations to towering complexes.

“The business just looked too easy,” says Dan Rosenfeld, a principal with development firm Urban Partners LLC and a longtime champion of the area. “The perception was that housing prices could only move in one direction—up—and that all you had to do was get a building permit, put a project on autopilot, and it would make money.” The amateurs who jumped into the business, Rosenfeld says, “are going to find out that real estate is a two-way street, and it’s going the other way now.”

Heading into the recession, downtown had seen more than its share of success stories: a doubling of the population in ten years (it’s around 38,000), stylish bars and restaurants, and meticulous restorations of such architectural gems as the Eastern Columbia Building. “The irony of L.A. is that in spite of itself it has done the right thing,” says Rosenfeld, pointing to such uncoordinated additions as the Staples Center, Walt Disney Concert Hall, and the subway.

Still, it’s an uneven work in progress. Freeway congestion makes arriving in time for an evening concert a challenge, a big and well-entrenched homeless population is within a block or two of the high-end gentrification, and large sections remain deserted on nights and weekends (try finding a coffee shop open on a Saturday afternoon). First-time visitors often can’t get past the user-unfriendliness of the place: Thoroughfares are too wide, sidewalks are too narrow, blocks are too long, and an angled street grid makes it easy to get lost. Some of the hassles can be mitigated, but not without boatloads of additional investment dollars—and very little of that money is available these days. The economics are out of whack: Banks don’t want to lend unless developers are willing to take a smaller cut, and developers don’t want to build unless banks provide better financing.

Before the Los Angeles City Council passed the adaptive reuse ordinance in 1999, which streamlined the process of converting unused office buildings into lofts, downtown had 11,626 housing units. Today the number is 25,221, with another 22,180 slated to go up. But of that 22,180, only a fraction—4,362—are actually under construction. The rest are in development limbo, either stuck in the city’s lengthy entitlement process or lacking the money to get under way. “We knew when the boom was ongoing that some of the projects would not go forward,” says Carol Schatz, president and chief executive of the Central City Association and one of downtown’s chief advocates. “I think that’s reality. Stuff goes forward, stuff doesn’t.”

Here’s why it’s a problem: For the July-through-September period, the median price of a new condo downtown was $502,000—36.5 percent below its peak of $790,000, according to Dataquick, a real estate research firm. That’s in line with the declines throughout the county and actually helps modulate the out-of-sight prices that were being asked for condos at the height of the real estate boom. However, it is well under what developers had expected to sell these units for. Waiting for the market to improve is not an appealing option because of the need to recoup the cost of construction and pay off investors and lenders—even assuming prices get back to anywhere near their peak. With condos not selling, the alternative is converting them into rentals. So far, eight buildings have made the switch, among them the 35-story 717 Ninth (developed by parking lot king Richard Meruelo); 1010 Wilshire, which was built in 1960 as the headquarters of Signal Oil Company and has been transformed into lavish corporate housing; and the Brockman, an 80-unit adaptive reuse development at 7th and Grand.

Demand for apartments is holding up, which is a testament to the area’s popularity. But buyers are always preferable. They pay for their units up front and are more likely to stay awhile. Renters tend to be transient, which means apartments can sit empty for months at a time and not generate enough cash to pay off the debt service. Higher turnover also results in heavier wear and tear. A building owner wanting to convert to condos when the market improves might end up paying $25,000 to $30,000 in renovation costs per unit. “No one knows what a condo is worth today versus tomorrow,” says real estate attorney Eric Rowen, a shareholder with the firm Greenberg Traurig and chief counsel for the Los Angeles County Economic Development Corporation. For that reason, he says, “a lot of these projects will end up in foreclosure and traded down one or two times before there’s enough equity to support the debt.”

Virtually everyone I spoke to says they want downtown to succeed, even those who question the relevance of an urban core in a city that is so sprawling. Within that broad-based support is a smaller group of true believers—people like developer Tom Gilmore, who spearheaded the adaptive reuse efforts more than a decade ago; Schatz, who has relentlessly lobbied city officials on behalf of downtown businesses (she routinely calls reporters to correct their stories); billionaire Eli Broad, who has made the Grand Avenue plan one of his priorities; and Tim Leiweke, chief executive of AEG, who calls L.A. Live a make-or-break moment in his career (“My reputation as a businessman is going to be decided on this one project,” he says).

What stands out in this group, beyond the oversize personalities, is a kind of small-town boosterism. In 2007, the long-awaited opening of a Ralphs grocery at 9th and Flower, the first downtown supermarket in decades, was practically a ticker tape event. The store, which features a mammoth take-out section and free 90-minute parking, has quickly become one of the chain’s biggest revenue producers. Its arrival, however, also underscores the retailers that have yet to sign on—as well as the ones already retrenching.

When Rite Aid closed its store at 7th and Los Angeles streets last fall, the question was whether the national chains were getting cold feet about investing in a transitional community. The ground-floor location was in the retail portion of the Santee Village project, formerly the site of garment factories and other low-wage businesses. “All the gushing press and publicity [about the project] couldn’t change the fact that the location backs up against skid row, one of the toughest precincts of the city,” wrote Jerry Sullivan, editor and publisher of the Los Angeles Garment & Citizen, a community weekly. “Downtown has not reached the sort of critical mass that matches the ‘live, work, and play’ sloganeering.” The Downtown News countered that the chain simply chose a bad location (Rite Aid has two other downtown stores). Bloggers blasted back and forth.

Downtown can live without the presence of a Trader Joe’s or a Barnes & Noble; some folks, in fact, prefer not having chain retailers that are familiar sights in other parts of Southern California. But putting aside aesthetics, these are the kinds of merchants that can legitimize a community. Their reluctance to commit is not unusual: A big retailer will frequently wait until the next census to determine whether a sustainable market exists. Given the current economic conditions, scrutiny will be intense.

Any lingering doubts about downtown’s viability get Mark Tarczynski in a lather. “I’ve got Target circling around downtown Los Angeles. I’ve got Bed Bath & Beyond circling around downtown Los Angeles. They haven’t landed yet, but they’ll be here,” says Tarczynski, senior vice president of CB Richard Ellis, who is in charge of leasing retail space. He is betting on a faster-than-expected turnaround later this year, with L.A. Live playing a critical role. “You’ll have four-and-a-half-million wallets walking around the streets of downtown Los Angeles looking for stuff to buy, places to eat, places to be entertained,” he says. “That is going to jump the retail infrastructure through the roof, which is going to create a whole new cycle of housing demand.”

From the time the entertainment district was first planned, the assumption among city officials has been that people going to a Lakers game or staying at one of the two convention center hotels would wander beyond the perimeters of Olympic and Figueroa. Ideally, a kind of “knitting” process would connect the various portions of downtown. What’s striking about L.A. Live, though, is how self-contained the place is. Many Angelenos see an event and leave. Jane Jacobs, a preeminent chronicler of urban renewal efforts in the 20th century, was right about large complexes being set off from the rest of a downtown. The problem, as she described in her classic 1961 book, The Death and Life of Great American Cities, is that they create borders, “and borders in cities usually make destructive neighbors.”

L.A. Live isn’t destructive, but it has little to do with downtown. Leiweke’s priority is to make the place “a juggernaut for point-of-destination tourism, travel, and entertainment.” It’s the old “if you build it, they will come” routine—and since the hotels broke ground in 2007, convention booking has jumped. Even so, Leiweke is a realist; he knows that many of the folks going to the L.A. Live complex are from out of town—often from out of the country—and they’ll be seeking amenities that downtown L.A. cannot offer. AEG’s 32-page L.A. Live advertising supplement in the Los Angeles Times had Leiweke pointing out that “we’re 15 minutes away from the Grove” and “only 30 minutes away from one of the most famous retail locations in the world: Rodeo Drive.”

After hearing him speak recently at a Los Angeles Public Library event, I walked over to the complex, where construction crews were wrapping up work on a number of restaurants about to open, including the ESPN Zone, a sports bar and restaurant, and Fleming’s Prime Steakhouse. Everywhere I looked were the banners and billboards of the companies helping to bankroll the project—Wachovia, Toyota, Anheuser-Busch, Nokia. To anyone who knows sports and entertainment marketing, it’s an impressive sight. AEG, which is owned by Denver billionaire Philip Anschutz and controls entertainment venues and sports teams around the globe, relies on such sponsorships because they negate the need for public financing. (The exception is AEG’s being allowed to keep the proceeds of the city’s room tax, an indirect subsidy that could be worth up to $250 million during the first 25 years of operation.) If this thing takes off—and chances are it will—you can expect AEG to put up other “Live”s around the world. All the company has to do is fill in the prefix.

That’s great for AEG, but it won’t do much for merchants in the Jewelry District or Little Tokyo. Crossing Figueroa, I check out a ritzy apartment building at 717 Olympic, where a two-bedroom on the 22nd floor is going for $4,200 a month. While it has a stunning view of the Hollywood Hills and only a few units are available, the ground-floor retail space is not yet leased. Two blocks to the north on Flower Street are long stretches of parking garages and empty lots. This leads to the scruffy Macy’s Plaza, with its brick facade that looks like an electric utility substation. In the entranceway of the lower-level food court, a homeless man is sleeping on a bench.

Downtown’s problem is that the dots are not connecting. Urban makeovers take time and are fueled by incrementalism, not girth. Tim Leiweke can’t wave a wand and make it happen. Nor can Eli Broad, or the thousands of recent arrivals in search of city living not available anywhere else in L.A. Another thing about makeovers: They require strong economies, and we’re years away from seeing one of those again. At the risk of offending the folks who want so badly to see a downtown renaissance, I can’t help stating the obvious: Lower those expectations.